Ranga price can step on the gas

Gas prices may see a sharp increase to around $7-8 per mmBtu (million metric British thermal units) if the government accepts the recommendations of a committee headed by C Rangarajan.

This will translate into a huge increase in fuel cost for fertiliser, power, steel and other user industries, and further into higher prices of their products. Besides, the subsidy bill is sure to rise even if farmgate prices of urea, diammonium phosphate and single super phosphate are kept at today’s levels.

The prime minister had appointed the panel last year to come up with a formula acceptable to both gas producers and users. Reliance Industries has for long been demanding an import parity price, i.e., over $13 per mmBtu, instead of the $4.2 that the government now pays.

The Rangarjan panel has recommended that the price be fixed taking into account the 12-month average of domestic production cost at the gas well, the US Henry hub, the UK national balancing pint (NBP) and Japan’s custom cleared rate. In other words, in arriving at the gas price here, only the well head prices in those three countries will be considered and not the transportation, storage, insurance and re-gasification costs.

Briefing journalists, Rangarajan said: “It will be like playing into the hands of vested interests” if the industry’s demand for across-the-board import parity is allowed.

The price of RIL’s gas from its D6 block will be in for a review with effect from April 1 next year. An empowered group of ministers headed by defence minister A K Antony will take a call on whether the revision be allowed before this date. Later, this will have to be ratified by the cabinet committee on economic affairs.

Earlier, a group headed by Pranab Mukherjee, then finance minister, had allowed RIL to charge $4.2 per mmBtu for five years, with a price review in 2014.

“It may be difficult for the government to fast-forward this date and lose the contractual pricing advantage that it has with Reliance as of now. Any such move may get CAG looking at the case afresh,” said a cabinet minister.

A sharp fall in the D6 gas output to 25.1 million standard cubic metres (mscmd) a day by November last year made it all the more difficult for the government to fast-forward the price revision. The five-year contract with the government stipulated an output of 80 mmcmd.

The Rangarajan panel has not set any deadline for the government to hike the price. The interpretation of some officials on the panel is that once the revised pricing formula is accepted, Reliance will be free to charge higher rates immediately.

Arvind Mahajan, a KPMG analyst, said: “The basic question is when the new formula becomes operative.” He said the new formula would allow gas prices to be better market-linked rather than the government-determined price, which was on a cost- recovery basis.

The Rangarjan formula will serve as a “better incentive” for investments in upstream businesses, he said. It would positively impact Reliance’s tie-up with British Petroleum for deep-sea exploration.

S Jaipal Reddy, when he was oil minister, had recommended a price review only after the expiry of the five-year contract. The present petroleum minister, Veerappa Moily, is on record that prices would not be revisited before the expiry of the contract. Rangarajan’s opinion is that the new formula would become operative “when present contracts come up for review.”

Rangarajan said, “The government needs to take a fresh look at all pricing issues of end products, such as fertilisers, power and steel.” Plus, it has also to look at the extra subsidy burden it will add.

The “arms length” price based on the new formula will be applicable to all user industries irrespective of the allocation priority the government accords.

The Rangarajan panel also supports CAG’s authority to audit any of the gas or oil wells, no matter who the operator is. It wants CAG to have the right to delegate its power to a panel of independent auditors to do SWOT analyses.

The panel has recommended the creation of an empowered group of secretaries and an inter-ministerial group to sort out any “technical and minor contractual issues with gas wells operators.”

The new pricing formula will be operative for five years with a provision for review later. The panel has proposed revenue sharing between the government and gas field operators instead of the cost-recovery formula.

The Directorate General of Hydrocarbons (DGH) has reportedly advocated a production-linked payment system, where oil companies will have to pay the government an agreed amount, depending on the level of output and not on the investment made. In the existing model, the contractor first recovers its expenditure before sharing profit.

Production-linked payment is said to be more transparent and will have less intervention in routine exploration and development activities. “The share will be determined through a competitive bid process for future PSCs. Bids will have to be made in a matrix, in which the bidder will offer different percentage revenue shares at different levels of production and price levels,” the report said.

Bids will have to be progressive with respect to both volume of production and price.

This will ensure that as the contractor earns more and the government gets progressively higher revenue. Besides, it will safeguard government interest in case of a windfall arising from a price surge or a surprise geological find.

The committee has recommended extending the tax holiday to 10 years from seven years in view of the fact that substantial drilling happens offshore at depths of more than 1,500 metres and the cost of a single well was as high as $150 million.

It also recommended extending the timeframe for exploration in future PSCs for frontier, deep-water (offshore, at depth of over 400 metres) and ultra-deep-water (offshore, at depth of over 1,500 metres) blocks to 10 years from eight years now.